As prospectors searched for the next big cryptocurrency in the gold rush of the 21st century, unbridled market confidence in ICOs created an environment in which the traditional metrics of investment analysis were discarded in favour of a conviction in blockchain that verged on religious fervor.
However, it seems that fervor has subsided. Stats from ICO Data show that money raised by ICOs during April is down considerably from January peaks. Whether it is the ongoing regulatory uncertainty, the tax deadline of late April, or just an overall lack of faith, investors appear to have lost interest.
Even as the number of ICOs available for investment has increased, the total amount of money raised has fallen—suggesting increased suspicion at the number of fraudulent offerings.
Tokens without a team, roadmap, or working product, but a strong desire to strike it rich, have managed to hit the prime time with a little savvy marketing. In fact, data indicates that ICOs with no working product actually outdid their contemporaries in the first month of trading.
But this success wasn’t built on a firm foundation, and ultimately caused lost profits, lawsuits, panic in the market, and an overblown response from governments trying to protect investors.
Many of these ICOs were little more than a solution looking for a problem, but they demonstrated that it was possible for companies to raise funds on the back of a promise, not a prototype, and inspire investor confidence without realising any revenue at all.
Consider, for example, Dentacoin, a cryptocurrency to pay your dentist with, a token that reportedly sold out in just five minutes, raising nearly two million USD, but then dropped from an ICO price of $0.000748 to crawl for months at $0.000100~. Perhaps the project that most epitomises the predicament is the Useless Ethereum Token, which openly offered an impotent ICO, and still received 310.445 Ether!
Investor fatigue and increased regulatory scrutiny
No surprise then, that investors have grown tired of ICO hype, and the same concerns have attracted the scrutiny of regulators, which is likely to have contributed to this recent ebb in cash flow for ICOs.
An increased pressure for ICOs to comply with SEC rules on KYC and professional standards, and a reduction in the number of ICOs offered to American citizens, is likely to have pushed out bad actors, and deflated a bubble that was artificially inflated by fraudulent offerings.
Recent news however, has been more encouraging, with South Korea announcing that it could potentially reverse the ICO ban imposed on March 13, 2018, and the SEC expressing a cautious optimism that the appropriate balance of regulation could be found. In a recent interview, SEC Commissioner Robert Jackson told CNBC:
"Investors are having a hard time telling the difference between investments and fraud [...] Down the road, I think we will be thinking about ways to make those investments work - consistent with our securities laws."
He also made the comparison between the current state of the ICO market, and other markets before widespread regulation, saying: “If you want to know what our markets would look like with no securities regulation, what it would look like if the SEC didn't do its job? The answer is the ICO market."
Authorities appear to be recognising that In the midst of this maelstrom of funding experiments there is the germ of a revolutionized financial system. One that has opened startups to a global pool of investors, transformed the world of crowdfunding, and could ripple out to alter the whole financial industry.